Why Alibaba Stock Was Underwater Today

Key Points

• An analyst downgraded his recommendation on the Chinese tech giant.

• This helped dampen the rally it had been experiencing recently.

• 10 stocks we like better than Alibaba Group ›

Monster Chinese tech company Alibaba Group (NYSE: BABA) wasn't looking all that mighty on the second-to-last trading day of the week, at least as far as its American depositary receipts (ADRs) were concerned. They shed 0.6% of their value that day, with a recommendation downgrade from an analyst being a chief catalyst. Alibaba's dip was close to that of the S&P 500 (SNPINDEX: ^GSPC) that day.

Fairly valued after rally

Well before the market open Thursday, US Tiger Securities' Bo Pei changed his Alibaba recommendation to buy from hold. Counterintuitively, this was accompanied by a price target raise to $180 per ADR from the pundit's previous level of $145.

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Image source: Getty Images.

Also rather counterintuitively, Pei's move comes just after Alibaba made several announcements about a stronger push into artificial intelligence (AI) technologies. Among other items, it said it would open new data centers to help stream AI functionalities, and trumpeted a fresh partnership with cutting-edge U.S. chipmaker Nvidia.

According to reports, the analyst's adjustment derives from his belief that with the recent bull run of the ADRs, Alibaba's potential has been priced into its equity. This exposes the value of the ADRs to short-term, downside risk.

No longer an irresistible discount

The analyst added that previously, one great appeal of Alibaba's ADRs were their significant discount to roughly comparable U.S. tech stocks. This has essentially been erased by the recent run-up in price. While Pei expressed admiration for the company's performance and its future-forward strategy, he thinks its current price basically reflects this.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.